Fed “Formula” of Lower Rates Doesn’t Work.. Market Calls Bullshit
This non-domain post for my investment club friends, although you are all welcome to follow along if you like.. As the dollar drills to new lows and commodities in our “inflationless” world scale new highs… Dick Bove absolutely nails it in the last 40 seconds of this 3 minute interview on Bloomberg this AM.. The Fed has no clothes
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/v0S_QJc2z8ws.asf
Nice work but you are stealing my lines:
http://www.idnforums.com/forums/13989-wall-streets-optimism-evaporates.html?highlight=no+clothes
Look at this piece from the BBC, I think Ben Bernanke is now preparing the ground for a significant increase in US interest rates. I think he is actually starting to get the message:
http://news.bbc.co.uk/1/hi/business/7085398.stm
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Sorry, lost the extract from that:
He blamed the slowdown on the credit crisis, which has made it harder for banks and individuals to borrow money.
He said that there was likely to be more “financial restraint on economic growth as credit becomes more expensive and difficult to obtain”.
In the longer term, he said that the greater premium attached to risk may lead to a healthier financial system.
“Investors have also become more cautious and are demanding greater compensation for bearing risk,” he said.
Related: “bankruptcy law changes exacerbate housing crisis” http://www.bloomberg.com/apps/news?pid=20601109&sid=a0EKOfVyqCD4&refer=home
1) It is amazing to me that one man’s opinion leads to the headline, “…Market Calls Bullshit”. Since when is one man’s opinion considered “The Market”?
2) Commodities prices are going up for all countries, not just the United States. On relative terms these price increases should not affect the dollar compared to other currencies, because all countries are being hit by this phenomenon. The reason for the increasing prices is up for debate.
3) The Fed did not want to lower rates, but felt it needed to calm the credit markets and increase liquidity so that the credit markets can work thru their problems and not cause a shock (ie. disintermediation) to the U.S. financial system. The large writedowns of loan value by financial institutions are causing lenders to be more cautious and fastidious in their lending practices, and causing some CEO’s to lose their jobs. Some of the home loans being done over the last few years were ridiculous and very risky. The financial institutions either ignored or did not understand the risks of these crazy sub-prime, “teaser-rate” mortgages. This is being corrected now, much like corrections you have seen in tech stock prices, gold, oil, real estate or tulip bulbs.
4) The Fed has plenty of room to raise rates because economic growth has shown no signs of significantly slowing.
5) The dollar is everone’s whipping boy right now, but it won’t stay that way for long.
***FS*** Market calls BS refers to lowering rates not stimulating Equities. The Fed cuts and the market tanks… that’s a market calling BS .. as a holder of dollars I hope you’re right on 5.
“Windows Media Player is required to view media clips on Bloomberg.com.”
Sigh.
You’re still in dollars Frank? Yikes.
Well as someone that has consistently predicted this dollar crisis for months, I would suggest that things have only just started.
Much of the dollars strengh has stemmed from its status of being the World’s reserver currency and the medium of exchange for most commodities. Those days are over, the dollar is now going to have to stand on its own two feet, in a very competitive World.
The US is going to have to focus on what it does well and start doing more of it at a competitive price. Yes, the US has had a strong economy, but much of it has been based on consumer spending using foreign debt. From here on in it going to be about what the US can produce that the World wants, that isn’t available in the same quality as the same price mark elsewhere.
US marketing is also going to have to get an awful lot smarter. It is going to be more about understanding local cultures and pitching it to them not only in their own languages, but in ways that those cultures can identifying with. The BS days of “They will all just have to learn English”, may not get be behind us yet, but until they are the US is going to struggle in Global Markets.
Frank, I guess my point was that the Fed does not have a particular agenda, except a stable and growing U.S. economy. The Fed did not lower rates to bolster the stock market. They lowered rates to stabilize the credit markets. The Fed and the stock market do not like surprises and shocks. When Greenspan made his “irrational exuberance” remark about the stock market he was worried that it was getting into an irrational, bubble stage that would create a tremendous shock to the U.S.(& world economy) when it popped. Just today, Bernanke came out and stated that he expected the economy to slow in the coming months. This surely would not be welcome news for the stock market, but it was stated so that the markets could prepare for just such a case.
Every year I see a “Coming Financial Crisis” book on the NY Times best-seller list. Go back and check all the crazy predictions of these books that never occurred. If one of these “gurus” happens to be even 50% correct they know that they will develop a huge following and be pronounced as the next great pundit.
I consistently see gold bugs stating that the U.S. dollar (like all world currencies) is only paper; a fiat currency. And gold is only a shiny, pretty metal…and diamonds are only highly-compressed carbon…and domains names are only text. It is the demand and scarcity of these items that drives their price. What can each one of the above items be exchanged for?
If I save my dollars, I can receive interest.
With a domain name hopefully I can receive parking/development revenue. With diamonds and gold I can wear them on my neck or finger and hope the value increases.
Without question, the Fed has been increasing the money supply at a relatively high rate. At the same time, until recently, the Fed was increasing interest rates for the same period to increase the cost of borrowing. The problems in the mortgage market came when sub-prime lenders were qualifying people for home loans with crazy “teaser” rate programs, that never should have been approved for the loans. This shock has hit the credit markets hard and left some large financial firms holding the bag.
I would ask you the last time the U.S. dollar was getting walloped this hard? It was in the late 1970’s and early 1980’s. Unemployment, Inflation and Interest Rates were stratospherically high. There was gas rationing and long lines at the gas pump. We were in a recession. Japan’s stock market had a higher total value than the U.S. stock market, and Iran was holding U.S. citizens hostage. This is hardly the case today.
In fact, there was great news announced yesterday on the inflation front, as productivity (per worker hour) increased 4.9% over last year. But most people do not seem to understand the effect that productivity or the velocity of money has on inflation. They just want to focus on the money supply or oil prices.
The herd has simply decided to sell the U.S. dollar because the momentum says to sell the dollar, and the facts be damned. We have seen oversold and overbought conditions in markets before, and the facts right now are not on the side of the dollar bears.
Some would say the drop in the dollar’s value is a precursor/prediction of Carter-era economics or the reduced standing of the United States in the world.
I would say that the demise of the U.S. dollar is greatly exaggerated.
As far as the marketing comments in #7, I would simply say look at the Top 100 Worldwide Brands and tell me how many are companies in the United States?
***FS*** Steve.. I’m one of the biggest pro-US guys there is.. The US economy has made me very successful and I’m grateful… But there are so many little problems that just don’t have a good talk-around. I think the biggest difference between today and the 1970’s relates to ‘our’ business.. Information.. it travels faster.. rumors get verified as fact.. “Gold-bugs” expose the flimsyness of the financial system in an online newsletter or chat room and smart people like Bill Gross read it and say “you know what? These kooks are right”. In the 1970’s that would never have happened. Information traveling freely, instantly, exposing inefficiencies, untruths, and changing the system that you and I formerly took for granted. It is different this time.. There is no Paul Volcker to take rates to 18% in order to burn-out the crap.. Today there is no appetite for discomfort.. You could say the biggest problem is the kind of coddling or protecting of ‘what is broken’ in the system.. You don’t get better by justifying the unjustifiable or by defending numbers which are fake or made-up. My financial prospectuses read: “Past performance is not indicative of future potential” .. I worry about the future potential of the US dollar when I see senators questioning Bernanke (yesterday on CNBS) and these folks (mostly) used the opportunity to show-boat for the camera.. We need a cleaner and fixer in the US.. I see none. Maybe Ron Paul.
The problem goes beyond the issue of competitiveness. We have trade and budget deficits. There is tremendous personal debt in the US. Oddly enough, it is funded by poorer countries which only now are having credit cards and other debt instruments being made available to the masses - to use and abuse.
A completely ignored factor: our expensive wars which are financed by assuming more debt.
This discussion reminds me of the old quote to the effect of “Democracy is a terrible form of government; unfortunately, all the others are worse.”
I can see problems with the dollar, but what do you move to in it’s place?
>From here on in it going to be about what the US can produce
>that the World wants, that isn’t available in the same quality as
>the same price mark elsewhere.
Alternatively, to stay in #1 spot, they’ll just bomb the crap out of everybody.
“I can see problems with the dollar, but what do you move to in it’s place?”
That is a matter for the markets and they are in the process of deciding just that!
“In fact, there was great news announced yesterday on the inflation front, as productivity (per worker hour) increased 4.9% over last year.”
Don’t you just love these kind of BS stats? If that were the case, assuming employment were stable your GDP just shot up by the same amount, and in Euro terms as well. The problem is that it is very difficult to tangibly identify what it is the US is actually producing except bundles of billions of dollars of worthless bonds!
Frank, I do find this post very intereting and stimulating.
I understand that there are a great many followers of Bill Gross and he has become a bond market guru for his past calls on interest rates and bond prices. I will use your line on this fact, and state that past performance does not guarantee future performance. I will say that his “calls” may have the ability to move the bond market and therefore become self-fulfilling prophecies much like Warren Buffet’s ability to move a stock price simply by announcing he has taken a position in the company. Buffet has become successful by strictly adhering to a set of valuation principles, including a unique ability to analyze business managers. Gross must rely on an incomprehensible number of economic variables to analyze the bond market.
There is no question that information is disseminated and digested much quicker than ever, but my disagreements are with the interpretations. Suddenly the flimsiness of the U.S. economic system has been uncovered. I hear this every time there is a little turmoil in the U.S. markets. We are not in a recession. We have relatively low unemployment. We have very little control over oil/gas prices. We have had large deficits before.
There are always things that can be fixed. What would you like to start with first? Do you really believe that our economic system is worse than that of China, Europe, Japan, Canada or Australia? What I believe is unique about the U.S. free market system is that its excesses cannot be hidden for long. Whether you are talking about ridiculously high tech stock prices, or Ceo’s reporting false financial information, or home loans with no money down and low starting rates, these “excesses” are rooted out and corrected swiftly.
To state that we need rates at 18% “in order to burn-out the crap” is the political equivalent to saying we should nuke Iran. Let’s nuke the economy and send it into a recession for no reason…at least the dollar will be stronger and we can all take vacations in Europe.
By also stating that I am “defending numbers which are fake or made up” is a quantuum leap to a conspiracy theory that I am certainly not prepared to make. This is exactly the problem I have with the interpretation of the information that is out there. If you are not looking at economic statistics, what are you looking at?
If senators and congressmen knew anything about our financial system or economics we might see some of those “fixes” you allude to. Social Security would have been fixed by now. Perhaps they do have this knowledge, but they are simply politicians first. There is one thing they ALL do agree on. When it comes time for redistricting they will insure that they come to an agreement so that they ALL keep their jobs. If you want to make a fundamental change, why don’t you look at Congress first and hold them accountable for their decisions, or lack thereof.
The comment in #12 is exactly what I have hinted at above. To call Productivity a “BS Stat” is a complete lack of understanding of the importance of all the information available. You can’t just pick and choose the information you use to make a judgement (do you do this in other facets of your life?). Productivity is a VERY important statistic that reflects REAL labor costs over the previous year. If Labor Costs go up by 4.9%, but Productivity goes up by 4.9%, then REAL labor costs have moved 0% for the year. You can see the importance of productivity relative to inflation. Productivity is a small component of GDP. GDP fluctuates with material prices, consumer demand, business demand, govt. spending, relative value of currencies and other numerous variables.
The bottom line is that when you look at the alternatives and the continued strength of the U.S. economy, there is no logical reason for the U.S. dollar to get hammered as it has.
I really do not believe I am defending the U.S. economy, but rather bringing to light some analysis that I believe is lacking in this thread.
The U.S. economy is the envy of the world, and a few hiccups are not going to change that in the forseeable future.
***FS*** Several institutional investors have suggested that the US is “now” in a recession, whether a politician/govt official has acknowledged that or not. Even if the wheels physically came off the economy, don’t expect anyone in authority to to use the “R” word in an election year. The “numbers” the government issues are fudged (every government does this).. How is it that a large, mature economy, the US, can see an explosive 4.9% productivity increase in a quarter? Doesn’t this defy the laws of economics and “street-feel” comon-sense? The data is not real. Neither is CPI.. In the Clinton era, beuraucrats adjusted and shaped the CPI so that it refects a more palatable number. At some point you (as an investor) have to put your thinking cap on and say “this just doesn’t make sense”. Maybe not 18%, but higher short/long interest rates would make the economy and dollar stronger long-term. I don’t think it would ‘nuke’ the economy and if the economy is so flimsy that it can’t function under slightly higher 7-10% rates then we don’t have much of an economy anyway. It would allow for a renewal and send a good message re the dollar. The US gets a huge global advantage in terms of being the world’s reserve currency. It can print money out of thin air to write checks to other governments. By debasing the dollar (increasing the debt limit.. printing more money) the US is telling the world “If you hold dollars .. you’ll get screwed”. When Reagan got elected the US had 1 trillion in national debt. Today it is 9 trillion. That’s why oil/gold are up.. George W. Bush has increased the debt more than all previous presidents combined! If foreigners start looking for alternatives to dollars, interest rates could do much worse than hit 18% .. and there would be no getting that genie back in the bottle once the dollar started sinking. I agree that the great thing about America is that the “funk” I am speaking about eventually gets exposed.. I guess the fundemental difference here is you believe this is a hiccup, a natural change in sentiment which will pass.. I think what we’re seeing is the beginning of fundemental change: a credit crisis and a dollar crisis all at once. Time will tell if that’s accurate.. Interesting perspective on bloomberg today: http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vHFR_WySac0Y.asf Quote: “Our whole system has been built on credit expansion.. we have to grow credit year over year in order to keep the economy growing.”
Frank, I will respectfully disagree with your outlook and answer a few of your questions/observations:
1) Compared to the rest of the world, the U.S. is certainly a large economy, but it is far from mature or stagnant. The U.S. is a dynamic economy with tremendous incentives to create, invent and take risks. Free market beliefs and lower tax rates allow for greater freedoms and the ability to keep more of what you earn. Europe is relatively stagnant for a number of reasons. Asia is also seeing dynamic economic forces where 40 years ago these countries would looked at as “backwoods” nations.
***FS*** US Taxes are going wayyyyyyy up (mark these words) there is just no choice. .. I admire the creativity and drive of the US.. If you speak English it is the global economy that matters. Europe is only stagnant from an outsiders (US mainlanders) perspective.. The fact that Europe is talking about ‘raising’ rates shows that they are not intimidated by their position in the world and lower US rates. Their economy in 2007 is far from stagnant.. that’s a carry forward from old-school talk. In fact Europe being “stagnant’ is something you’d hear on CNBullS***(CNBC) Europe is doing better than ever.. Products get made and shipped from EU countries to the rest of the world and their collective debt (consumer and govt.) is low..
2) The Productivity number is a 4.9% increase from the 3rd quarter of 2006 to the 3rd quarter of 2007. This increase is over a year’s period of time and no it does not defy any law of economics that I am aware of. The data could be off by a few tenths of a percent, but I believe the data is certainly a good indicator of what is happening with labor costs.
***FS*** You’re absolutely correct.. In my zeal to quote a statistic, I forwarded something pre-forwarded in a colleagues email.. but he quoted it because he was confused by the wild swings in other unrelated statistics.. which returns to the fire-starter that “government statistics” in 2007 are so unreliable and maleable that they just don’t matter .. One month numbers are favorable.. The market moves.. the next month those numbers are re-adjusted.. the market does nothing. .. So there is an incentive on the part of government to report favorable (massaged) numbers only to re-report corrections in subsequent months. Incidentally.. just the swing between Q2 and Q3 2007 productivty is still a miricale given the tenor of the street.
3) I am not sure why you need to raise rates for a “renewal” or to strengthen the dollar. Do you think that the people standing in the unemployment lines will look at a recession as a “renewal”? How do higher interest rates cleanse the economic system? The only message I see is “Let’s make a knee jerk reaction to the speculation in the U.S. dollar and the U.S. economy be damned”. It was not that long ago when the dollar was much stronger and the U.S. trade deficit was at its zenith, that many analysts were saying we should weaken the dollar because the trade deficit is going to cause us big problems down the road. Do you remember that?
The dollar was actually much stronger then, interest rates were much lower and the great concern was over the trade deficit. Well, the trade deficit is lower and the dollar has come down and interest rates over that period have gone up, but now the crisis is the reduced value of the dollar.
***FS*** Let me explain my viewpoint of why you need either much, much higher interest rates or zero interest rates with ammended and related regulations. To accept my theory you have to accept that people, companies or governments have to be incentivised/rewarded for saving. If I have money and I give you money, you have to pay me for the privelege. The US has very little ‘real’ Money.. it is deeply in debt.. What it has is “currency”.. A brand that people have historically believed in. Real money is gold, silver.. real estate.. boats, cars, airplanes material things.. coffee, sugar, clothing, oil.. anything really ..so long as it is accepted as amedium of exchange globally and can’t easily be debased. Currency is something which anyone can create more of… Something which you can convince other people to be valuable: ie.. printed currency, stock certificates.. etc… We’ve really had just one global settlement currency (the US dollar) for the past 38years since Nixon took us off the gold-standard .. so that was fine so long as people accepted it. It was the only game in town. But the problem today is: Information .. websites say “the dollar is worthless” and back it up with real information .. so if you accept ‘that’ information and think a few steps ahead.. then you’ll come to realise that US financial authorities will ultimately have a very short list of choices. Either A) manage the dollar’s perception (brand) globally.. convincing people to continue to accept it (guns won’t do the trick in this free information age); raising interest rates to reward those savers who underwrite the economy.. or B) Regame the currency vs. other currencies by setting US rates lower.. perhaps to ZERO and adding regulations/much higher taxes to homogenize the mix.. I don’t want to monopolize your comment but suggest you read this for my opinion of one such alternative: http://www.pimco.com/LeftNav/PIMCO+Spotlight/2006/Spotlight+Dialynas+Parikh+04-2006.htm (Warning: This is a very long read if you’re not into economics… :))
4) There is a great case to be made that the increase in natural resource prices in this century is mainly due to the voracious appetite of the Chinese economy that has been growing at nearly 10% per year. There are certainly other reasons why gold, oil and base metals can be increasing in value besides expectations of economic turmoil.
***FS*** That’s just not so Steve .. They are still making gold and oil after all… bringing it out of the ground.. As an investor I would strongly encourage you to think outside the box.. Gold has no real use other than jewelry.. the fact that people covet it is a signal of investor psychology.. just like .com names are perceived to be more valuable than .net .. nothing you or I say will change perceptions related to .com names. Gold is a much larger market than .com names. Nothing you or I say here will move the market.. the m,arket is telling you something if you care to listen.
5) The U.S. economy is so important to foreign businesses that there is no reason to look to alternatives, unless you are looking at China or South Korea, and unquestionably investment has been moving into those countries. There is a very good reason when the U.S. stock market really tanks, foreign stock markets fall in response. Many of their businesses are dependent on U.S. demand. A crash in the U.S. stock market can easily cause a worldwide recession.
***FS*** You are overselling the US economy’s importance.. It is not important to China that middle americans buy laundry baskets for 5.99 or 7.99 at Walmart.. there is an 80/20 rule at play that says so long as tech co’s buy cisco routers made in china for tens of thousands (and similar high value/margin products) everything will be okay.. Think about the 80/20 rule of consumerism..
I definitely do not see a fundamental change coming for the U.S. economy. We will need to address Social Security and the Chinese economy will become a much more important player in the world economy. I do see speculative markets behaving as…well…speculative markets. Perception, and not underlying facts, are what move markets. I believe perceptions will greatly change for the U.S. dollar when the Iraq War begins to wind down.
***FS** My thoughts of late excluded social security completely.. If you factor those obligations in, things get very ugly indeed.. Currencies of the world are ultimately a marketing effort.. So I agree a president liked the world over could make the US dollar desirable again. Ultimately ou have to convince people to take your paper over another form of paper, but the fact that we’re having this conversation at all shows that the clock is ticking. People are getting more savvy to values of things. Those who govern the USD have taken it’s value for granted for too long.. US profligacy is catching up to it. This past summer vacation (in Canada of all places) I could not exchange my USD cash.. for the first time the business owner said “no”… at any exchange rate!~ Perhaps in the future, US voters will take a more active interest in the relative values of their currency and hold law-makers to task. Not today folks. Most Americans today don’t know, understand or care.. They only know what a beer, tank of gas or bag of groceries costs within their state… Then again, perhaps it’s better that way. It’s just over a year now until the new US presidential election. We still have the luxury of choosing the dollar’s destiny by marketing our currency to the world.. Things get very murky beyond late 2008… JMO